Goods and Services Tax

26 February 2014

Subromaniam Tholasy Director of Internal Tax Royal Malaysian Customs

Agenda

Weaknesses of SST

1

2

Why GST

3

Budget Proposal on GST

GST Impact

4

5

Conclusion

Budget

Proposal on

GST

GST is a Replacement Tax

GST

6%

SST

5%,6%, 10%

& specific

rates

•

Charged on



taxable supplies made in the country

(threshold > RM 500,000)



imported goods (only taxable goods)

6%

GST

6%

GST

GST Safety Net in Malaysia

Poultry & Livestock (chicken, duck, cow,

goat, etc)

Supply of piped water to domestic users

Agricultural products – rice, paddy and

vegetables

Fish, shrimps, prawns,crab, cockles,

squid

Exported goods and services and international

services

Supply of first 200 units of electricity to domestic

users

Basic food - rice, flour, sugar, salt, infant milk,

cooking oil

EXEMPTION (No GST)

Public Transport

Toll Highway Residential Property

Land for Agriculture & General Use

Financial Services Education

With large base of zero-rated items and exemption of

critical sectors including government services, Malaysian model makes GST in Malaysia Progressive and Not Regressive

THRESHOLD = RM 500,000

80% businesses are expected to be excluded Health Services

Why GST

2

• Part of the government’s tax reform programme to make it

more efficient, effective, business friendly, transparent and

capable of generating a more stable source of revenue

→

Effective (

self-policing and overcomes inherent

weaknesses of SST)

→

Efficient (l

ess bureaucracy)

→

Capable of generating a more stable source of revenue

(not susceptible to economic downturn)

→

Business friendly (lower cost)

→

Foreigners and tourists will have to pay tax on

consumption

→

Transparent (long-term benefit in terms of pricing)

GST as % of GDP and total tax

2009 2010 2011 2012 Avg.

11.22% 11.05% 10.05% 10.09% 10.60%

Malaysia SST (Sales & Service Tax) Contribution to the Total Tax Revenue

Note : Depends on the tax rate

• SST base is too narrow

• Inherent weaknesses contribute to lower productivity

• GST@6% expected to give additional RM 3.87 Bil after tax and non-tax packages and incentives in the first year

• Contribution to total revenue could improve significantly over time

Weaknesses

of SST

1. SST - COST TO BUSINESS

Goods/services

purchased

Value

Sales tax@10% or

service tax@6%

Office Furniture

20,000

2,000.00

Telecommunication 10,000

600.00

Audit Fee

3,000.00

180.00

Consultancy

10,000

600.00

Insurance Premium 10,000

600.00

Tax cost

RM3,980.00

2. CASCADING EFFECT

Total tax paid by consumer = RM 2,220 (RM1,800 +RM360+RM60) Charges: RM1,000 6% Service Tax: RM60 Legal Services Telecommunication services Professional Engineer Consumer paid = RM31,800

Customer

Charges: RM29,580 (RM30,000 – RM420) 6% GST : RM1,774.80

Charges: RM 6,000 GST 6% : RM360

Total tax paid by consumer = RM1,774.80 Charges: RM1,000 GST 6% : RM60 Savings = RM445.20 Legal Services Telecommunication services Professional

Engineer Consumer paid =

RM31,354.80



GST eliminates cascading in the same tax regime

CASCADING EFFECT

Factory price: RM4.00 Sales tax 5% = RM0.20

• Sales tax paid (RM0.20) by hotel operator embedded in the selling price

• Products sold by the hotel will be taxed again

Consumer paid RM7.63 (RM7.20 + RM0.43)

Total tax paid RM0.63 (RM0.20 + RM0.43) Purchase price: RM4.20

Hotel selling price :

RM7.20 (RM4.20 + RM3.00) Service tax 6% = RM0.43



Scenario 2 (due to multiple tax)

 Product : Biscuits

Sales tax 5% Service tax 6%

CASCADING EFFECT

Hotel selling price : RM7.00

(RM4.00 + RM3.00) GST 6% = RM0.42

Savings to the consumer = RM0.21

16

Manufacturer Wholesaler Retailer Consumer

Cost RM 100 + 10% tax (RM10) + 20% Margin (RM 22) RM110 Govt collects: Tax RM10 Tax Nil RM132 + 30% Margin (RM 39.60) RM171.60

Final price paid by Consumer Tax Nil RM10.00 Total tax collected by Govt RM 5.60

Total tax loss/ uncollected Businessmen “free ride” RM10 x 20% = RM2.00 (10 + 2) x 30% = RM3.60 RM10.00 *Tax ballooned to RM15.60 (10 + 2 + 3.60)

3. COMPOUNDING EFFECT

Manufacturer Wholesaler Retailer Consumer Cost RM 100 + 20% Margin on RM100 w/oTax (RM 20) RM100 Govt collects: Tax RM 6 Tax RM 1.20 RM120 + 30% Margin on RM120 w/o Tax (RM 36) RM165.36 Tax RM2.16 + 6% tax on RM20 (RM 1.20) + 6% tax (RM6) RM6 RM7.20 + 6% tax on RM36 (RM 2.16) RM156 RM9.36 Final price paid by Consumer RM9.36 RM 0 (Zero)

Total tax loss/

Total GST collected

COMPOUNDING EFFECT

 GST is an effective tax because it is captured at every stage  (Assume GST at 6%)

Manufacturer Wholly owned subsidiary Retailer Consumer Cost RM 100 + 10% tax (RM10) Sells at RM200 RM110 sells at RM 250

Under GST, Gov’t would be able collect tax based on final retail price and irrespective of intermediary sales

4.

TRANSFER PRICING ISSUE UNDER SST

Manufacturer Wholly owned subsidiary Retailer Consumer

HOW GST OVERCOMES TAX LOSS THROUGH TRANSFER PRICING. Assumption: GST at 6%

Sales: RM 100 Output Tax : RM 6 Assumption: No input tax Sales : RM 200 Output tax : RM 12 Input tax : RM 6 Net tax : RM 6 Sales : RM 250 Output tax : RM 15 Input tax : RM 12 Net tax : RM 3 Government collects

RM 15.00

Malaysian Co. TP Actual

M’sia Co. import value 10,000.00 5,000.00

Effective duty rate 4% 4%

Landed cost 10,400 5,200.00

Other expenses 1,000.00 1,000.00

Total cost 11,400.00 6,200.00

Sales 12,000.00 12,000.00

Profit before tax 600.00 5,800.00

Tax (25 %) 150.00 1,450.00

Net Profit after tax 450.00 4,350.00

GST provides opportunity to minimise loss of corporate tax revenue due to transfer pricing (over-pricing of imports)

TRANSFER PRICING ISSUE - IMPORTS

Tax liability 150.00 vs

SULIT

GST provides opportunity to minimise loss of corporate tax revenue due to transfer pricing (under-pricing of exports)

Malaysian Co. TP Actual

M’sia Co. export value 10.00 20.00

M’sia Co. cost 9.00 9.00

M’sia Co. Profit 1.00 11.00

Tax (25 %) 0.25 2.75

Profit after tax 0.75 8.25

Singapore’s Marketing Company

TP TP (Actual)

Singapore Co. SP 22.00 22.00

Cost 10.00 20.00

Profit before tax 12.00 2.00

Tax (17 %) 2.04 0.34

Profit after tax 9.96 1.66

Profit Impact of the Organization

as a whole TP TP (Actual)

Profit before tax 13.00 13.00

Total Tax 2.29 3.09

Profit after tax 10.71 9.91

35 % difference in total tax

GST Impact

4

GST able to address the inherent weaknesses of SST

SST

GST

•

Cascading and

compounding effects

•

Eliminated

•

No complete tax relief for

export

•

Exports are zero-rated and

eligible to claim input tax

•

Transfer pricing

•

Tax at multi stages

addresses the issue of

transfer pricing

23

Peninsula Malaysia

2.0%

Sabah

1.5%

Sarawak

1.6%

Average

1.8%

2. CPI

Issue Will GST increase the burden of the rakyat?

•

GST will not burden the rakyat

 GST will replace the sales tax (5% & 10%) and service tax (6%) which the rakyat is currently paying for

 GST will not be imposed on basic food and necessities

 RM300 one-off cash to BR1M recipients as household assistance

 Individual income tax rates reduced by 1% to 3% to increase their disposable income - 300,000 tax payers will no longer pay tax

 Families of RM4,000 household income will no longer pay tax

 Chargeable income subject to the maximum rate of exceeding RM100,000 will be increased to exceeding RM400,000. Current maximum tax rate of 26% will be reduced to 24%, 24.5% and 25%

3. IMPACT ON CONSUMER

• Issue GST increase the burden of the rakyat

• Quote from Harakah dated 26 Oct 2013 – PAS Chief Information Officer

“Moreover, Malaysians are not given adaption period to the GST and it was announced at such a high rate at 6 percent. In Singapore, the GST was introduced at a rate of 3 percent before increasing it gradually to 7 percent.”

Question: Is this true?

 Singapore 3 % but almost all supplies are taxable

 Singapore never had any consumption tax before 1994

 Please compare the current rate of proposed 6% with a large safety net to the Singapore’s 7% (full blown version of GST)

 In Malaysia, additional tax base is only about 20 - 25%

 80% small businesses will be excluded (high threshold)

 Net impact is minimal – CPI (1.8%)

26 38.8 22.2 9.4 27.5 22.7 18.7 4.2 13.7 27.8 5.0 20.0 40.0 % key :

Food and

non-alcohol Utilities Transport

Lowincome Mediumincome Highincome

Source: HES

Expenditure pattern of Malaysians – Low income

spends nearly 40% of income on basic food (zero-rated)

Tax Incidence Under GST

Low Income Group Income RM 2000.00 Tax Incidence at 6% GST Expenditure on zero-rated items RM640.00 RM0.00 Expenditure on exempt items RM707.40 RM12.73 Expenditure subject to GST RM652.60 RM 39.16 Total RM 51.89 Total Expenditure RM2000.00 Tax Burden as %to expenditure 2.59%

High Income Group Income RM 12000.00 Tax Incidence at 6% GST Expenditure on zero-rated items RM1093.86 RM0.00 Expenditure on exempt items RM2155.08 RM27.59 Expenditure subject to GST RM5751.06 RM 345.06 Total RM 372.65 Total Expenditure RM9000.00 Tax Burden as %to expenditure 4.14%

IMPACT ON CONSUMER

•

Issue GST is regressive

• The model has taken into consideration the welfare of the

rakyat especially the lower income group

→ Basic foods, water and electricity are zero rated

→ No GST is imposed on services provided by government

→ Mass public transportation, education, health, toll, residential

property and financial services exempted from GST

→ Proposed threshold (RM500,000) will exclude small businesses from

being registered under GST

•

GST rate is one of the lowest in the world

→ reduces the impact on prices

•

Issue GST is regressive

Quote from Malaysian Insider dated 26 Oct 2013

“This is a regressive tax where the poor would be taxed more than the rich,” said Lim Mah Hui, from the Socio-economic and Environment Research Institute (SERI).”

‘

Question: Is this true?

Issue GST is regressive

(From Malaysian Insider dated 26 Oct 2013)

Question: Is this true?

•

Issue GST is regressive

• Quote from Malaysian Insider dated 26 Oct 2013

Fellow of Malaysian Institute of Economic Research (MIER) Professor Emeritus Datuk Dr Mohamed Ariff Abdul Kareem said that handouts and exemptions do not take the sting out of the GST.

“Those who earn less than RM2,000 and didn't have to pay taxes before this will now have to in the form of GST. This will eat into their salaries and, adding to their household debts, which is now at a worrying level, they will have to pay more for most things so they will have less disposable income,” he told The Malaysian Insider.”

Question: Is this true?

•

Issue GST is regressive

• Quote from Free Malaysia Today dated 26 Oct 2013

“Refuting the federal government’s repeated assurance that it won’t affect the low income group, the Penang Institute today claimed that their study involving 24,768 ”living quarters” showed that at 6% GST, prices of items will go up by as much as an additional 3.38%.”

The study was done by Dr Lim Kim Hwa, Fellow at Penang Institute, and Ooi Pei Qi, research analyst at the same think tank.

Question: Is this true?

Prof. Glenn. P Jenkins

Economics Professor, Queen University, Canada

“ A broad based consumption tax, such as a value

added tax, is generally considered to be a regressive

tax. This conclusion, however has not taken into

account the fact that in developing countries the

commodities

on which poor households spend

most of their income, is not taxed. When this factor

is considered, VAT can be naturally progressive

Working Paper

Comments on GST

•

Issue

Price increase due to profiteering

→ Introduction of Price Control and Anti Profiteering Act 2010



Effective on 1 April 2011

→ Shoppers’ guide



To inform consumers on price changes of goods and services

before and after GST implementation

→ A comprehensive awareness and training programme on GST

Issue

High initial and compliance cost to

the businesses after GST implementation

• Threshold of RM500,000

 Small businesses will be excluded to be registered under GST

• Corporate income tax be reduced from 25% to 24%

• SME companies income tax be reduced from 20% to 19% from 2016

• Cooperative income tax rate be reduced by 1 to 2 percentage points from 2015

• Secretarial fee and tax filing fee are allowed as tax deductions from 2015

Cont.

• Cost of purchasing ICT equipment and software is given Accelerated Capital Allowance until 2016

• Expenses for training in accounting and ICT relating to GST be given tax deduction for 2014 and 2015

• RM100 million Training Grant provided to businesses that send their employees for GST training in 2013 and 2014

• Financial assistance of RM150 million for purchasing accounting software to the SME in 2014 and 2015

• GST is not a cost to the industry

 GST paid on the business inputs can be claimed as tax credit

IMPACT ON INDUSTRIES

Issue – The Government ability to pay GST refund

within the stipulated time frame

•

The Government will ensure that GST refund will be paid

within the stipulated time frame

 refund is guaranteed within 14 or 28 workings days

 GST Refund Fund to be established

 Interest on late refund can be considered later

Malaysian products and services become more competitive

•

Exports and international services are zero-rated

Promote more tourists to visit and to spend in Malaysia

• Tourist refund scheme

 at international airports

• Designated area

 Labuan, Langkawi and Tioman

 no GST

Computable General Equilibrium Model (CGE)

GST will increase the GDP to 0.3%

→ export (0.3%)

•

Conclusion

5

Dato’ Sri Khazali bin Ahmad

Director General of Customs

“Implementation of GST in Malaysia should not be viewed in

isolation. GST in Malaysia is implemented in a package. To

offset the regressive impact of a broader taxation base on

low-income, the Government has proposed zero-rating on

basic food and exempting the essential sectors from GST.

Moreover, tax packages and non-tax packages are also being

introduced to lessen the impact”

Interview with Media 25 October 2013

Subromaniam Tholasy

Royal Malaysian Customs

“GST is actually a Beautiful Tax System. I am glad that we are finally

adopting it. It is not a cost to business. In fact the businesses would

gain because the operating cost would be lower under GST. GST

also going to make our exports more competitive. GST is a very

transparent tax system which makes it harder for unscrupulous

traders to take advantage and this would ultimately benefit the

consumers in Malaysia”

Interview with NTV 7 26 October 2013

Dato’ Kamariah Binti Hussain

“GST in Malaysia would protect the low income group. We have

studied the consumption pattern of various income group in

Malaysia and made our Model a Progressive one, unlike many

countries where GST is regressive. The model is designed to

lessen the impact of GST on Rakyat and at the same time

overcome the inherent weaknesses of SST ”

GST Public Consultation 26 October 2009

Dato’ Zaleha Hamzah

Advisor, Royal Malaysian Customs

“We're not talking about a tax on an item in isolation or a GST in

isolation, we're talking about a tax that is self-policing, efficient

and effective; that is going to make evasion and avoidance more

difficult. GST is a way forward towards making Malaysia a high

income nation. GST will broaden our tax base and this will

facilitate the aim of a tax reform as recommended under the New

Economic Model”

Interview with RTM 2009

Thank You

Thank You